The White House budget chief says US economy has almost bottomed out, predicts lower deficits.

The White House’s budget director says the economy has almost bottomed out and the sense of economic free-fall is over.

Peter Orszag (OR-zag) says that as the economy improves in the months ahead, the nation’s budget will run lower deficits. He also says that the Obama administration’s financial assumptions are going to be updated because of higher-than-expected unemployment rates.

The budget director says President Barack Obama is committed to changes in the health care system this year. Orszag says the president’s plan to provide health care to millions of uninsured Americans would not add to the federal deficit in the short term, and actually reduce it in coming years.

Upfront Costs Complicate Obama’s Health Care Plan

Let’s take another look at Cost of Health Care Plan Soars; Obama might Renege on Campaign Promises.

Costs are emerging as the biggest obstacle to President Barack Obama’s ambitious plan to provide health insurance for everybody.

The upfront tab could reach $1.2 trillion to $1.5 trillion over 10 years, while expected savings from wringing waste and inefficiency from the health care system may take longer to show.

Details of the health legislation have not been written, but the broad outlines of the overhaul are known. Economists and other experts say the $634 billion that Obama’s budget sets aside for health care will pay perhaps half the cost.

I responded with …

So Obama has a plan, and that plan is an estimated 50%, $634 billion in the hole at the outset (the estimated amount over 10 years). However, government programs are always much more expensive implemented than proposed. Therefore, a more resaonable estimate of costs might be 2-5 times greater than proposed. And even if by some miracle the costs come in as expected, the world’s most expensive healthcare system is about to get much more expensive.

This is not a plan, it’s a nightmare.

Can I see the math?

I would like to see how providing health care to millions of uninsured Americans will not add to the federal deficit.

More Free Lunch Keynesian Nonsense

Free lunch theories are coming out of the woodwork (or rather every corner of academia). Latest up to bat is Alan Blinder, Princeton professor of economics. Please consider It’s No Time to Stop This Train.

CONTRARY to what you may have heard from some doomsayers, 2009 is not 1930 redux. What we must guard against, instead, is 2010 or 2011 becoming another 1936.

That’s the good news. But even if another depression is next to impossible, there is still the danger that next year, or the year after, might turn into 1936. Let me explain.

From its bottom in 1933 to 1936, the G.D.P. climbed spectacularly (albeit from a very low base), averaging gains of almost 11 percent a year. But then, both the Fed and the administration of Franklin D. Roosevelt reversed course.

In the summer of 1936, the Fed looked at the large volume of excess reserves piled up in the banking system, concluded that this mountain of liquidity could be fodder for future inflation, and began to withdraw it. This tightening of monetary policy continued into 1937, in a weak economy that was ill-prepared for it.

About the same time, President Roosevelt looked at what seemed to be enormous federal budget deficits, concluded that it was time to put the nation’s fiscal house in order and started raising taxes and reducing spending. This tightening of fiscal policy transformed the federal budget from a deficit of 3.8 percent of G.D.P. in 1936 to a surplus of 0.2 percent of G.D.P. in 1937 — a swing of four percentage points in a single year. (Today, a swing that large would be almost $600 billion.)

Thus, both monetary and fiscal policies did an abrupt about-face in 1936 and 1937, and the consequences were as predictable as they were tragic. The United States economy, which had been rapidly climbing out of the cellar from 1933 to 1936, was kicked rudely down the stairs again, and America experienced the so-called recession within the depression. Real G.D.P. contracted 3.4 percent from 1937 to 1938; the total G.D.P. decline during the recession, which lasted from mid-1937 to mid-1938, was even larger.

The moral of the story should be clear: Prematurely changing fiscal and monetary policies — from stepping hard on the accelerator to slamming on the brake — can be hazardous to the economy’s health.

Moral of the Story

Blinder goes on to rant about the “laissez-faire crowd that ruled the roost in 1930 and 1931“. The truth of the matter is Blinder does not know the difference between a free market and the tooth fairy.

At some point, the free lunch has to stop, and when it does stop there will be a hard relapse. Moreover the sooner it stops the better off we will all be in the long run.

Blinder states “Wow, we’ve learned a lot since the ’30s, right? Well, maybe not. For the echoes of 1936 are being heard right now, even before the current recession hits bottom.

Clearly Blinder has learned nothing. The cause of the Great Depression was the unsustainable runup in credit the preceded it, compounded by anti-laissez-faire stupidity such as the Smoot Hawley Tariff and FDR’s own policies some of which were declared illegal by the US Supreme Court!

Blinder is in serious need of a history lesson as well as a lesson in remedial economics.

The Great Depression ended with World War II and the only reason the US came roaring out of it was our productive capacity was not destroyed while most of the rest of the world’s was.

Add Alan S. Blinder, professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve to the every growing list of Keynesian fools struck with an incurable case of the Fiscal Insanity Virus Rapidly Spreading The Globe.

All this concern over H1N1 (Swine Flu) is misplaced. FIV is far more contagious and its effects far more economically damaging.

Mike “Mish” Shedlock
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